What is the purpose of collateral?

The purpose of collateral is to serve as a security for a loan or obligation, reducing the lender's risk in the event of default. By providing collateral, the borrower assures the lender that they can recover some or all of the loan amount by seizing the collateral asset if necessary. This arrangement often results in lower interest rates for the borrower and increases the likelihood of loan approval. Additionally, collateral can enhance the borrower's credibility and financial standing.